Dr Pepper vs. Dr Pepper: Sweet Business Turns Bitter

Dublin Dr Pepper Bottling Co. has been making the soda in Dublin, Texas since 1891. And the family-owned business puts the town name on their bottles. Parent company Dr Pepper Snapple Group isn't happy about that. WSJ's Mike Esterl reports.

By

Mike Esterl

July 12, 2011

DUBLIN, Texas—Tiny Dublin Dr Pepper Bottling Co. has been selling the sweet-tasting Dr Pepper soft drink from this small town since 1891. A handful of diehard fans love the soda so much they regularly make pilgrimages to the rural community, and some buy the cane-sugar-sweetened "Dublin Dr Pepper" off the Internet.

Now the world's oldest Dr Pepper bottler is locked in an escalating dispute with the owner of the Dr Pepper brand over modern-day trademark rights, Internet sales and cane sugar as it tries to extend its reach across the country.

Dr Pepper Snapple Group Inc., which owns the brand and licenses territory to Dublin Dr Pepper, sued the bottler, with sales of $7 million a year, in late June. Dr Pepper Snapple—the third-largest U.S. soda company, with revenue of $5.6 billion last year—says Dublin Dr. Pepper is diluting the Dr Pepper brand, as well as stealing sales from other Dr Pepper bottlers by selling outside its approved territory.

In a lawsuit filed in a federal court in Sherman, Texas, Dr Pepper Snapple Group is demanding the bottler remove "Dublin'' from its "Dr Pepper'' labels and stop selling the soda beyond a 44-mile radius around Dublin.

Dublin Dr Pepper sells less than 1% of Dr Pepper's annual U.S. volume. But its sales and cachet have grown in recent years as it has promoted its status as the oldest Dr Pepper bottler and the fact that it has always used cane sugar to sweeten its soda. By contrast, most bottlers began switching to less-costly high-fructose corn syrup in the 1970s.

A Shake-Up at Dr Pepper

The central Texas bottler started adding "Dublin" to the labels of Dr Pepper bottles and cans in the 1990s. At the same time, it began selling the local version of its soda on its website alongside other "Dublin Dr Pepper'' paraphernalia such as key chains, coffee mugs and even clocks.

"The Internet has certainly been our friend," said
Bill Kloster,
Dublin Dr Pepper's president and chief executive. Mr. Kloster's family owns about 90% of the bottler.

Many storefronts are empty in Dublin, population 3,800, and the local dairy industry is wilting under drought. Peanut farmers decamped decades ago after exhausting the soil, and rodeos no longer stop here.

But each year, as many as 80,000 visitors flock to Dublin, drawn to the antiquated bottling plant in the center of town and the lure of its old-fashioned soda. Robert Wright said he began making regular pilgrimages in 1968 from his Fort Worth, Texas, home 80 miles to the northeast.

"It's sweeter," said Mr. Wright, a 67-year-old defense-industry executive, as he drank Dublin Dr Pepper last week at Old Doc's Soda Shop next to the plant, his 8-year-old granddaughter in tow.

Dr Pepper Snapple, based in Plano, Texas, said in its lawsuit that the bottler also is selling its products through its website to restaurants and retailers across the U.S., "from New York to California.'' Dublin Dr Pepper's Facebook page has more than 30,000 fans, with aficionados in New Mexico, San Francisco and Washington, D.C. recently trading tips about local product sightings.

Steven Wolens,
Dublin Dr Pepper's attorney, said that Dr Pepper Snapple,
PepsiCo Inc.
PEP -0.62%
and
Coca-Cola Co.
KO -0.82%
may be trying to squeeze his client out of the still-small-but-growing market for soda that uses cane sugar. Last year, 71% of Dr Pepper was distributed through bottlers tied to Coca-Cola or PepsiCo, according to Dr Pepper Snapple.

PepsiCo and Coca-Cola denied any involvement in the dispute, and Dr Pepper Snapple said sugar has nothing to do with it. "This lawsuit is not about what is in the bottle. It's about what's on the bottle," said
James Baldwin,
Dr Pepper Snapple's general counsel.

The Food and Drug Administration says there is no significant health difference between cane and beet sugar or high-fructose corn syrup, and major soda makers say blindfolded consumers can't taste the difference. Sugar also costs more than high-fructose corn syrup. Still, companies are dipping their toes back in sugar as more consumers demand natural sweeteners.

PepsiCo switched its Sierra Mist soda to sugar last year and has introduced "Throwback'' sugar versions of Pepsi-Cola and Mountain Dew. Coca-Cola sells some sugar-fueled Coke imported from Mexico. Dr Pepper Snapple and its bottlers have rolled out more sugar-sweetened Dr Pepper recently, including in 2010, the brand's 125th anniversary, although it still represents less than 1% of the brand's volume.

Some bottlers back Dr Pepper Snapple for tackling what they say is a growing problem with transshipments, in which one bottler's soda is sold in another's territory. Soft-drink companies have long granted exclusive territorial rights to bottlers, a practice protected under the Soft Drink Interbrand Competition Act of 1980.

"I applaud Dr Pepper Snapple for drawing the line,'' said
Bill Brown,
head of family-owned Brown Bottling Group in Jackson, Miss., which bottles Pepsi and Dr Pepper.

Transshipments have grown in his territory over the past three years as industry competitors claw for sales in a tough economy, and Dublin Dr Pepper is among the brands he has seen, he said.

Dublin Dr Pepper says it is responding to consumers who approach it, whether by car or Internet. It has temporarily stopped selling soda on its website under pressure from Dr Pepper Snapple, but still takes orders on a toll-free telephone line. It also has tentative plans to invest $2 million in a new plant to produce more Dr Pepper locally.

Much of Dublin Dr Pepper's machinery dates to the 1930s and the plant only runs once a month, enough to refill about 2,000 glass bottles that have circulated for decades. Since the 1990s, it has outsourced most of its production to Temple Bottling Co., a larger independent Dr Pepper bottler in Texas about 110 miles to the southeast.

Miles Gilman, owner of Granny Clark's, a Dublin diner, says customers start ordering the local version when he opens his doors at 6 o'clock in the morning and estimates about one-third are tourists.

"This town would dry up without it,'' Mr. Gilman said. He likened Dublin Dr Pepper's taste to "a dark beer'' and said regular Dr Pepper is more like "a light beer.''

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